Revealing Fed’s Secrets Fails to Produce Harm That Banks Cited
By Bob Ivry, BLOOMBERG, Apr 2, 2011
The Federal Reserve warned that releasing details of its lending could lead to a rapid loss of public confidence in borrowers and possible bank failures.
The harm “is not simply a theoretical possibility,” the Fed said as it argued against disclosure in a lawsuit brought by Bloomberg LP, the parent company of Bloomberg News. Its brief said a stigma attached to borrowing from the lender of last resort might mean possible depositor runs, drops in a borrowers’ stock prices and “in extreme cases, closure of the institution.”
Since the unprecedented release of records related to the Fed’s discount window March 31 under a court order, the KBW index of 24 banks has risen 1 percent. JPMorgan Chase & Co. (JPM), which borrowed at least $5.9 billion in 2007 and 2008, gained 0.5 percent Friday. Morgan Stanley (MS), which borrowed as much as $6.9 billion in October 2008, fell 0.2 percent in New York Stock Exchange composite trading.
“If people saw the data the day after the loans were made they might come to the conclusion that the bank must be in trouble, but two years later it means a significant gain in public information,” said Representative Barney Frank, a Massachusetts Democrat who sponsored a financial regulatory reform law that bears his name.
The 29,000 pages of documents, which the Fed released in pdf format on a CD-ROM, revealed that foreign banks accounted for at least 70 percent of the Fed’s lending at its October, 2008 peak of $110.7 billion. Arab Banking Corp., a lender part- owned by the Central Bank of Libya, used a New York branch to get 73 loans from the window in the 18 months after Lehman Brothers Holdings Inc. collapsed.
The central bank distributed the records after the Supreme Court last month rejected an industry group’s attempt to block the disclosures. Bloomberg and News Corp. (NWS)’s Fox News Network LLC had sued the central bank for various records under the Freedom of Information Act.
Bloomberg’s request, submitted in May 2008, sought records from the discount window and other emergency programs from April and May 2008. Fox requested documents as recent as March, 2010.
While the Fed didn’t join the bank group’s appeal to the high court, the Clearing House Association LLC, a group of the nation’s largest commercial banks, adopted the central bank’s argument when it petitioned the high court last October.
‘Threatens to Harm’
“Disclosure of this information threatens to harm the borrowing banks by allowing the public to observe their borrowing patterns during the recent financial crisis and draw inferences -- whether justified or not -- about their current financial conditions,” the Clearing House said in its petition. The group’s members include Bank of America NA, Citibank NA, JPMorgan Chase Bank NA and Wells Fargo Bank NA.
US Bancorp (USB) Treasurer Kenneth D. Nelson said in an interview that central bank officials encouraged the Minneapolis-based institution to use the discount window “as another funding option at the end of the day to close out our Fed position.” US Bancorp is a member of the Clearing House Association.
“At least 10 years ago they encouraged us and said there is no stigma to using the window at the end of the trading day, and during the crisis they stepped up that encouragement to help them stabilize market rates,” Nelson said. US Bancorp, the fifth-largest U.S. bank by deposits, rose in New York Stock Exchange composite trading Friday.
The Dodd-Frank law, enacted last year, required the Fed to release previously undisclosed data on nine emergency facilities. Since then, the KBW index has risen 10 percent. The law also directs the Fed to release the names of discount window borrowers, starting July 22, 2010, after two years.
That time lag makes stigma less of an issue, said Alan S. Blinder, former Fed vice chairman and now a Princeton University economics professor.
“Banks that borrow from the discount window may be weak sisters,” but delayed disclosure gives them time to take steps like raising capital or shedding bad loans, Blinder said.
More important than a shift in bank shares is whether disclosure will make banks more reluctant to borrow from the discount window in the future, said J.D. Foster, a senior fellow at the Heritage Foundation in Washington and former chief economist at the U.S. Office of Management and Budget.
“The real issue is, going forward, a bank that got itself into temporary trouble and won’t go to the Fed for a loan,” Foster said. “You don’t want to be in that situation.”
To contact the reporter on this story: Bob Ivry in New York at firstname.lastname@example.org.
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